The pound jumped to within touching distance of the 1.35 resistance level against the dollar on Wednesday – a one week high – after data showed British inflation hit a 10-year high in October, bolstering expectations of a rate hike as soon as next month.
Consumer prices increased by 4.2% in annual terms in October, jumping from a 3.1% increase in September, the Office for National Statistics said on Wednesday. Both the Bank of England (BoE) and economists had forecast a reading of 3.9%.
The stronger than expected UK inflation data, alongside Tuesday’s upbeat employment figures, reinforces the case for the BoE to raise borrowing costs in December.
Inflation is also being felt by UK firms who were hit by rising costs in October, forcing them to hike their own prices at the fastest rate in a decade.
Input prices – what businesses pay for things like raw materials, parts, and labour – rose by 13% year-on-year in October from 11.9% the previous month, which represents the highest rate since September 2008.
GBP USD briefly touched 1.35 overnight.
Dollar remains supported by US retail data
The dollar still had a spring in its step on Wednesday following strong retail sales data from the previous day that raised bets on earlier Federal Reserve interest rate hikes.
With inflation running hot, the consumer spending figures boosted expectations of a rate hike as early as mid-2022. Investors also believe the figures could tempt the Fed to hasten the tapering of its asset purchase programme.
However, Chicago Federal Reserve President Charles Evans reiterated that it will take until the middle part of next year for the central bank to complete winding down the programme.
Speaking at a virtual conference by the Mid-Size Bank Coalition of America on Wednesday, Evans said: “We learned back in 2013 that tapering these asset purchases was preferable for financial market functioning; that if we did a sudden stop on our purchases that wasn’t well-received,” adding “It’s going to take us until the middle of next year to complete that,”
Figures from the Commerce Department on Wednesday showed home building in the US unexpectedly fell in October against a backdrop of material shortages, labour shortages and scarce land.
Housing starts fell 0.7% to a seasonally adjusted annual rate of 1.520 million units last month. Economists had forecast that starts would rebound to a rate of 1.576 million units.
Meanwhile, permits for future home building increased 4% to a rate of 1.650 million units last month.
A barren UK economic calendar today means the pound could remain elevated on the back of the inflation report. Two notable economic indicators are scheduled for publication in the UK tomorrow: Gfk consumer confidence and retail sales for October.
Initial jobless claims for the week ended 12 November and the Philadelphia Fed manufacturing survey for November are slated for release from the US economy today.
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